In the June 2020 edition of General Insurance Insights, I looked at how the COVID-19 pandemic[1] was specifically influencing many GI lines of business and coverages. One of the areas I examined was the business interruption (BI) coverage included in commercial property policies. At the time I wrote the article, there were many unknowns surrounding the coverage. Insurers were denying many BI claims resulting from the pandemic based upon their interpretation of the policy wording, insureds were considering suing their insurers over coverage denials and politicians in some jurisdictions were considering legislation that would compel insurers to pay BI claims from the pandemic even when the policy wording clearly excludes this coverage. In this article, I will provide an update on how the issue of BI coverage for claims resulting from the pandemic has developed over the past six months.

BACKGROUND

The COVID-19 pandemic compelled many governments around the world to invoke stay-in-place orders or lockdowns to slow down the spread of the virus. While some businesses could continue having employees work from home, a wide range of other businessessuch as restaurants,[2] bars, workout facilities, beauty salons, hotels, theaters and clinics for elective health carewere forced to remain closed or severely restrict operations. While these government orders helped to slow down the spread of the virus, it has caused financial distress for the businesses that had to restrict operations. Many businesses require financial assistance to make it through these challenging times.

Some governments around the world have made funds available to individuals and businesses harmed financially by the pandemic. While government assistance programs vary significantly by jurisdiction, funds from government assistance are generally intended to provide basic requirements. They generally do not fully compensate the financial loss incurred.

Many businesses harmed financially by the pandemic looked to their property insurers for compensation from the BI coverage in their policies. BI coverage in a commercial property policy generally provides compensation for lost income (and some expenses) due to a business being shut down because of a direct physical loss. As is the case with many commercial policies, policy wording is often modified to the exposure being underwritten.

BI coverage was generally intended to cover the costs of business interruption due to physical damage or loss to property from an insured peril. Some policies have wordings that make this point very clear, while others were less clear. Some policies specifically mention that disease is an excluded peril, while others make no mention of this exclusion.

Insurers have mostly denied BI claims resulting from the pandemic due to the interpretation that the pandemic does not constitute physical damage or loss to the property from an insured peril. For policies with a disease exclusion, denial of claims for BI coverage from the pandemic should be clear. For policies without this exclusion, questions of coverage can arise. Whether or not disease constitutes physical damage is one of the main issues being looked at by the courts.

Court proceedings take time. Some businesses may not survive the time it takes for cases to be resolved. Some state legislators in the U.S. are considering legislation that would compel insurers to pay BI claims for losses due to the COVID-19 pandemic to keep affected businesses out of financial distress. .

"APCIA estimates that closure losses for small businesses with fewer than 500 employees are estimated to reach between $393 billion to $668 billion per month. Surplus for all the U.S. home, auto, and business insurers combined to pay all future losses is roughly $800 billion, with the combined capital of the top business insurance underwriters representing only a fraction of that amount." The American Property Casualty Insurance Association (APCIA), April 28, 2020

There are several arguments being made by the lawyers of insureds who were denied BI coverage. These arguments include the following ideas on how the pandemic caused an impairment of property (that may be interpreted as a direct physical loss or damage to property):

Temporary loss of use of property due to lockdowns and stay-in-place orders is an impairment of property.

Potentially contaminated property is an impairment of property.

In 2006, the Insurance Services Office (ISO)[5] introduced policy language for excluding loss due to viruses, bacteria and contagious diseases. Many general insurers in the U.S. use ISO developed policy wordings for commercial policies. Before this, many insurers had already included a virus exclusion as a response to the SARS outbreak of 20022003. The ISO language of 2006 standardized the wording being used for this exclusion.

The ISO policy wording for commercial policies also includes details on BI coverage from actions of civil authority referring to how the coverage is triggered. The ISO wording states that the trigger involves physical damage to property from a covered peril, other than to the insured property, in which access to the insured property is restricted by civil authority due to the damage to the other property causing a dangerous physical condition in the surrounding area. This ISO wording would appear to invalidate using a government stay-in-place order for COVID-19 as the covered peril of civil authority for a BI claim unless there is physical damage to property from a covered peril.

Of course, not all policies are the same. Some use standard wording. Some use standard wording that is modified. Some use unique language tailored to the needs of the insured. Additionally, not all commercial property policies sold include BI coverage. That is because BI coverage is an optional coverage that can be added to a commercial property policy for additional premium. Sometimes BI coverage is a separate policy instead of an add-on to the commercial property policy.

There are hundreds of cases filed against insurers over the denial of COVID-19 BI coverage.

The following outlines developments in a sampling of this case:

Gavrilides Management Company v. Michigan Insurance Company:

This case was notable because it was the first decision on this issue from a state court and it dealt with both the physical damage requirement and the virus exclusion. In this case, Gavrilides Management Company, owner of two restaurants, sued its insurer, Michigan Insurance Company for BI coverage due to a government ordered COVID19 shutdown. The case was filed in a Michigan state court. In the proceedings, Gavrilides asserted that coverage was afforded by the policy because their customers inability to dine in the property constituted physical damage and the virus exclusion was too vague. Early in July, the judge hearing the case ruled against the plaintiff noting that the physical damage requirement in the policy was not met. Furthermore, the judge stated that even if the physical damage requirement had been met, the virus exclusion would have been sufficient for the insurer to deny coverage.

Time element losses is a special type of indirect outcome, which involved a time element in the assessment of the outcome. Based on the given case, provide your opinion on whether COVID-19 caused physical property loss and damage to the insured property. Can the plaintiff win the case?